@GRIAusConf_Plenary Panel: The Role of Reporting In The Transition To A Sustainable Economy - Jane Diplock
Plenary Panel: The Role of Reporting in theTransition to a Sustainable EconomyProf. Ian Ball CEO, International Federation of AccountantsJane Diplock Director, Singapore Exchange; Former Chair of the New Zealand Securities Commission; Former Chair of the Executive Committee, International Organisation of Securities CommissionsDamien Walsh Managing Director, bankmecuSimon Longstaff Executive Director, St James Ethic Centre
INTEGRATED REPORTING AND CHALLENGES GRI CONFERENCE Melbourne March 2012 Ladies and Gentlemen Before I start I would like to acknowledge the Wurunderjeri (Wa-run-jeri) people of the Kulin nation, the traditional owners of this landand pay my respects to their elders past and present. Please let me say how delighted I am to be here this morning andto join such illustrious speakers on the panels at this Conference. Ibelieve we are at a crucial moment in the history of IntegratedReporting and would like to suggest some strategies for the nextcritical steps in the journey to the vision of global integratedreporting standards universally implemented. If you ask any thoughtful 20 plus year old what we in our generationneed to answer for, they could say we stood by while one cohort ofmanagers of financial institutions, stole or lost their pension fundsand therefore their futures, They would probably say we havestuffed the planet and stuffed the global financial system. Both needto be fixed. It is my view that these two issues are closelyinterrelated.
I would just like to take a few moments to recap on the wonderfulsuccess that the Integrated Reporting movement has achieved.From being a glint in the eyes of a number of great thought leaders,HRH The Prince of Wales in his wonderful elegant and thoughtfulpublication Harmony, the legendary work of the truly amazingMervyn King whose Report King 3, transformed reporting in one ofthe most rapidly growing new economies in the world, South Africa,and has had great influence world wide, profound academicthinking led by Bob Eccles and Michael Krzus in their landmark OneReport, in a period of less than 5 years ,combined with the work ofthe International Integrated Reporting Committee now Council, astellar collection of influential people and its extremely able CEOPaul Druckman with his very able staff huge progress has beenmade! Other stakeholders such as GRI and civil society have contributedhugely. Activities are happening all around the world. Recently acoalition of investors NGOs and universities urged the Bank ofEngland to investigate how exposures to polluting andenvironmentally damaging investments might pose a systemic riskto the UK financial system and long term growth. The investor community has also demonstrated increasing interest,and activity by investors, has increased markedly the signatories tothe UN Principles of Responsible Investment. Since the global
financial crisis these principles have being increasingly embraceduntil entities holding many trillion assets under management aresigned up, approximately 20% of the worlds capital.Companies are also on board. Last December I heard a fascinatingand revealing presentation given by the Chairman of Puma on thework they are doing as a member of the very exciting pilot programengaging numerous companies around the world. The list ofcompanies engaged is very impressive. Therefore you could say the right players are engaged and activeand scanning through the responses to the recent IIRC DiscussionPaper there is a growing and impressive consensus building. But itis my contention this morning that there is more to be done. We need to engage the worlds political decision makers and todemonstrate that the economic well being of the global financialsystem and their countries is dependent on this initiative goingforward. It is my experience that global standards rarely gain solid globaltraction without strong political will. The IOSCO experience isinstructive. A set of global standards was agreed in 2000. Theywere voluntary and adoption was piecemeal around the world untilthe corporate scandals of Enron and Worldcom plus the horrors of
9/11 convinced many policy makers that the seamless exchange ofinformation between regulators was vital and so the first compulsoryadoption framework was formed with the development of theMultilateral Memorandum of Understanding. Eventually by 2010every jurisdiction had signed or committed to doing so.However it was not until the Global Financial Crisis of 2008 that therealisation dawned that financial stability of the worlds economiesdid not rely merely on good prudential regulation of banks, but thatgood regulation of capital markets was also important. Only then didthe political will emerged to ensure the full implementation of globalsecurity market standards. This view of the "virtuous twins" offinancial stability was essential to the focus of the Financial StabilityBoard and its masters the G20, mandating global compliance withthe IOSCO standards. Underpinning the adoption lay academic work on the networktheory of markets by such thinkers as Andrew Haldane, Deputygovernor of the Bank of England, but unfortunately it took the neardeath experience of the global financial system to gain the G20attention in this way as many of the prevailing theoreticians stillendorsed unbridled freedom of markets and the full belief in theefficient market hypothesis.
Part of the problem for capital market regulation lay in the bright linebetween the regulated and unregulated markets. Banks werelargely regulated unless they had an investment banking arm, offbalance sheet vehicles or securitisation products, which along withtheir valuation mechanism, credit rating agencies, wereunregulated. The unregulated shadow banking system was so largethat Clara Furse then CEO of the London stock exchange said shefelt like she was holding a torchlight in a darkened football fieldwhen the real game went on around her. This was a perimeter orboundary problem. Despite all the talk of Principals basedregulation, a bright line was there and actively gamed by thefinance profession. I believe we have a similar perimeter problem in corporatereporting. Investors are left like Clara Furse shining their torchlightson the rear view mirror of one year in the annual report or 3 monthsin the quarterly report, while the real game of environmental, socialand governance risks the corporation, public sector entity or evensovereign, faces is playing out in the darkness around them. It is my proposition that this has very distorting effect on marketbehavior and leads to short term investment decisions which add tovolatility and fragility in the global capital markets. It underminesfinancial stability in a critical way.
Could it be financial stability is in fact a three legged stool withintegrated reporting as a third leg supporting and balancing theother two? Our global markets are based on the concept of fulldisclosure and information symmetry. How can that be achieved inboth the prudentially regulated context or the capital marketssphere without global implementation of integrated reporting? I willcome back to these questions, but first lets look at short termism. Short termism is of concern to to many trying to build the businesscase for sustainable investment. Al Gore and David Blood haverecently suggested that the short term perspective is "driving oureconomies and our planet into liquidation". If this is so, why is ithappening? Is short termism greater now than it used to be? A fascinating article by Andrew Haldane Deputy Governor of theBank of England ( Short Termism: An Impatient Market is not aHappy market 3rd Sept 2010) sheds light on this. He points out that markets are about matching saving to investmentwhile realising the benefits of patience and the growth associatedwith this. He points out that investors tend to excessively discountfuture outcomes. He quote Pigous "defective telescope facility"which shows that discounting is not only myopic but increasesthrough time, leading to hyperbolic discounting.
Peoples preferences alter as distant outcomes become closer tothe present, the long term investor can become the short termspeculator if assets can be cashed. In the 1940s he points out themean duration of US equity holders was around 7 years. For thenext 30 years up until 1970 little changed . But in the subsequent 35 years the average holding has fallenspectacularly. By the 1987 crash the holding period had fallen tounder 2 years and by the turn of this century it had fallen to below ayear and by 2007 it was 7 months. Impatience is mounting. Trends internationally are much the same. Why is this so? Somestructural factors have assisted this. Some of them are positive.Transaction costs in equities have fallen, other trends such as highfrequency trading may have directed the mean duration the otherway. Future cash flows are also undervalued by investors. According toHaldane cash flows for 4 years ahead are discounted at rates moreappropriate for 6 to 10 years ahead. Future cash flows according toHaldane are severely undervalued by investors and this trendseems to have grown in the 20th century.As Andrew Haldane points out excess volatility in markets is adistorting tax on long duration instruments and policy measures
may be needed to offset this distortion. In other words we need tomandate some way of addressing this. He suggests providingincentives for long duration asset holdings, or disincentives for shortterm behavior eg holding period levies on financial instruments, orto use governance measures ,voting rights or appointment of boardmembers linked to duration of equity holdings. All of these may beuseful to limit short termism. However today I would like to venture into an area Andrew Haldaneprobably wisely doesnt develop. What has actually caused theretreat to short termism he so lucidly outlines? Is this discounting merely the reduction of friction of transactioncosts lowering or could it also be the short term focus encouragedby the current reporting regulatory frame work? What influence hasthe introduction of quarterly reporting had ? In a world of increasinginformation accessibility, has the reporting and assuranceframework fallen far behind? Has the investing community found the limited risk frameworkavailable to them under the current mandated reporting under IFRSand US GAAP inadequate to accurately assess the value of thosecash flows going forward and have therefore chosen to heavilydiscount the future cash flows of an enterprise because the
information they have access to, while voluminous, is manifestlyinadequate to assess the future risk profile adequately? The answer may be to provide a much more holistic informationoffering to investors to enable them to make more realisticassessments of those future cash flows through IntegratedReporting. Andrew Haldane suggests that it is important financesticks to the patient evolutionary path. To do so, he says the fidgetyfingers of the invisible hand may need a steadying arm. What better steadying arm than the greater transparency ofintegrated reporting?Strategically what should we do from here? How can we "up theante" or raise the consciousness of those we hope will assist in theglobal standards adoption process? Perhaps our strategies shouldbe both top down and bottom up.I consider we need a narrative which clearly articulates the urgencyand importance of the issue of integrated reporting to the globaleconomy and to financial stability, outlined in the language andarguments central bankers will find compelling and persuasive. We need a call to action which will pull this issue onto the agendaof the G20 and the Financial Stability Board. Such action wouldthen gain the attention and priority setting of the international
standard setters who have long list of strategic projects before themand may quite reasonably resist the imposition of yet another call totheir time and energies. I have a couple of suggestions to assist this process. Firstly theconstruction of the narrative itself is very important to ensure it iscompelling and I do believe that is part way there, but therelationship to short termism,volatility,future valuation and financialstability issues needs to be further developed. Perhaps we couldapproach some thoughtful academics to do further work on this. Wecould then approach the FSB with a well argued proposition foraction.At the same time, refinement of a set of draft standards, tested bythe current pilot process, and formulated by the very ablesupporters of Integrated Reporting who have standard settingexperience could assist international standard setters. This wouldhopefully shorten the process of developing global standardsimplementable world wide.Secondly I wonder whether we could use social networking toencourage those thoughtful 20 year olds I mentioned earlier to become engaged in this movement and to militate for the changes weall consider so important. Here too we need a narrative which theywill understand and relate to and advocacy which will galvanize
them to call for change. The recent social network activity worldwide and its results in the Arab Spring, the use of crowd sourcingand the changing way political communication is occurringreinforces our need to embrace this phenomena which is clearlythe way of the future. Recently I went to a presentation where we were exhorted to"unleash the inner Lady Gaga in all of us". I am not sure whetherLady Gaga is the right person to relay an Integrated Reportingmessage but many of her 47 million followers would agree andunderstand that the fixing of the planet and the global financialsystem are vital to their future prosperity.